- Parcel is being transformed by e-commerce, with a greater focus on B2C shipments, new competitive dynamics between Amazon and retailers, and an increasing need to accommodate big and bulky items.
- Many 3PLs are developing innovative approaches to competing with FedEx and UPS, leveraging their inherent flexibility advantages over these industry giants.
- Against this backdrop of change, several emerging technologies have the potential to further transform the way the growing parcel segment operates.
While the incredible rise of e-commerce has had major ripple effects across the supply chain, arguably no mode of transportation has been affected as much by the dramatic e-commerce-driven shift in consumer behavior as parcel delivery has. Today, just about anything can be moved by parcel—whether it is a frozen paleo meal, a Peloton bike requiring assembly, or even a dishwasher that needs plumbing and electrical installation. To be sure, the direct-to-consumer phenomenon is still nascent, but its impact has already been profound.
Just how has parcel evolved in the wake of e-commerce? And how are third-party logistics (3PL) providers responding? In a panel discussion at the 2018 Harris Williams Transportation & Logistics 3PL Conference, leaders in the sector offered their perspectives on those topics, as well as some of the forces at work in parcel and the broader direct-to-consumer/last-mile markets.
The Evolution of Parcel
In the past decade, the parcel segment has experienced tremendous change, driven by converging forces that have upended traditional product buying and delivery models. With a front-row seat for parcel’s evolution, panelists offered their thoughts on three of the biggest trends they have seen during this time.
Expansion from B2B to B2C
One of the biggest and most obvious changes has been the expansion from business-to-business (B2B) to business-to-consumer (B2C). One panelist noted that only four years ago, his company was nearly exclusively focused on B2B, but has made a strong push into B2C.
Regardless of approach, companies making the push have encountered a common challenge: how to deal with consumers’ expectations for free shipping. Amazon’s promise of two-day “free” delivery notwithstanding, the reality is that there is a real cost involved for any kind of shipping, and that is an issue all shippers and 3PLs must confront.
One 3PL has determined the best approach is to develop bifurcated delivery networks: One involving traditional independent contractors getting paid set fees or commissions to handle routes serving the B2B market, and another, lower-cost model to deliver products to consumers’ homes.
Yet despite the growth in B2C, final-mile delivery in the United States is still largely a regional proposition—even the largest of providers struggle to deliver final-mile service on a national basis, according to panelists.
B2C also has had an impact on peak-season surges. With more packages being delivered to more homes, parcel capacity is getting scarce. 3PLs report getting numerous calls from retailers that are not regular customers looking for help with “surge volume,” but are often disappointed when they are turned away. Panelists noted that during peak times, they focus on ensuring they have sufficient capacity for existing customers, and can provide the level of service they need to, so they do not fail customers during the most important times of their year.
Retailers’ Responses to Amazon
No company has done more to disrupt retail—and, by extension, logistics—than Amazon. And retailers are still scrambling to figure out how to compete. One big advantage traditional retailers have is in fulfillment—specifically, their brick-and-mortar stores that are close to consumers’ homes. Retailers are beginning to explore how they can use their stores as distribution points for e-commerce orders, which can give them a leg up on Amazon or at least make them more competitive, especially when it comes to same-day delivery. Amazon does offer one-hour delivery in a few select, very dense metro areas (e.g., New York City). Outside of those cities, however, Amazon cannot match the number of potential distribution points that incumbent retailers have.
3PLs see this effort firsthand in their business. One panelist noted his company has evolved into providing “multi-hub” fulfillment solutions on a global basis to retailers that can no longer compete in an omni-channel world with just a few large regional DCs trying to meet a wider range of demand.
Retailers also are employing strategies that enable them to reduce distribution costs while still satisfying consumers’ delivery needs. For instance, in the past, retailers sent parcels to their individual stores. Today, different retailers in the same geographic region are working with 3PLs to consolidate shipments from their DCs to their stores to increase the density in their networks. Retailers also are shifting to “unmanned” deliveries—meaning 3PLs arrive at a store in the early morning before it opens and employees have arrived for work, let themselves in with their keys, drop off the products, and move on to the next store. The idea is to avoid pulling revenue-generating store associates from the store floor to handle deliveries.
The Case of “Big and Bulky”
As e-commerce continues to grow, last-mile delivery capacity is getting increasingly difficult to find. That is especially true for large items. These “big and bulky” products—think large-screen televisions, bicycles, and appliances—are hard to handle efficiently because they are non-conveyable. These items occupy considerable space in a delivery van; therefore, fewer products can fit in the vehicle. As a result, UPS and FedEx, whose business models are built on extreme efficiency, are trying to move away from such products, levying steep surcharges on them to discourage shippers from sending these products through their systems. For drivers who are independent contractors, that translates into fewer stops and, thus, less money earned. Add to this the fact that shipper margins are fairly thin on many of these larger, bulkier items, and it becomes clear that handing such items can be a challenging proposition.
What does this mean for 3PLs? For some, it is a market they, too, steer clear of due to the inherent infrastructure limitations and economic challenges (unless they can get the shipper to agree to reconfigure the freight in some way to make it conveyable). Yet others see a large and growing opportunity. They could choose to partner with FedEx or UPS to accommodate goods that don’t fit the more rigid “Purple” or “Brown” systems, although one panelist noted that such an arrangement carries its own set of risks. Or they could compete directly with UPS and FedEx in that space by either acquiring or building the requisite capabilities. One panelist, for instance, sees immense opportunity in this market to not only deliver large, heavy goods to the doors of consumers’ homes—more quickly and with far less damage—but also to assemble and install those goods in the consumer’s room of choice.
Dealing with “Purple and Brown”
Two of the biggest beneficiaries of the e-commerce boom are UPS and FedEx, which today handle the lion’s share of last-mile delivery. While those two companies are obviously formidable competitors, 3PLs believe there are considerable opportunities to gain a share of that business by excelling in what UPS and FedEx do not: flexibility.
Retailers want to be able to take online orders increasingly later in the day and still be able to promise next-day delivery. That means the pressure is on carriers to accept inventory well into the night and get it out the door the next morning. While UPS and FedEx have strict deadlines for when freight needs to be in their system to avoid charges for expediting, 3PLs can be more accommodating. One panelist said his company now can provide next-day service even if it receives shipments as late as 3:00 a.m.—without charging a premium.
As finely tuned machines that rely on consistency and predictability, UPS and FedEx are understandably reluctant to accept exceptions—products that do not fit in their system. Thus, 3PLs have an advantage if they can offer what one panelist called “end of spectrum” services. This means handling anything retailers need to deliver a great omnichannel consumer experience—including big and bulky goods.
While UPS and FedEx have limits on their next-day delivery distance, 3PLs that can stretch the number of miles they will cover on a next-day basis can gain an edge. One panelist said his company can, in certain regions, go as far as 600 miles for next-day delivery, and do it at a standard ground price. That is an expedited-shipment situation for UPS and FedEx, with a premium price.
Getting Heavy on Tech
Like virtually all companies, 3PLs are heavy users of technology, in the office, the warehouse, and over the road. According to panelists, in the next several years a number of new and emerging technologies with potential application to their business are worth watching.
Visibility and track-and-trace technologies
Both shippers and end customers increasingly want to be able to know where their orders are at any given time. Leading 3PLs continue to work with their customers on implementing technologies—such as RFID chips in or on individual packages and apps through which customers can engage with delivery drivers in real time—to provide such connectivity and visibility.
The success of Uber and Airbnb could change the way 3PLs think about where they get capacity for deliveries. Panelists agreed that the idea of using an Uber-like approach to last-mile delivery is certainly worth exploring, particularly in the case of low-value, easily handled goods. However, the potential risks involved—especially with high-value products or controlled substances—could limit its adoption on a broader scale.
Transportation management systems
According to one panelist, the use of transportation management systems to optimize carrier spend among shippers today is exceedingly low. He expects that to change soon, as cloud-based solutions arrive on the scene that can help shippers quickly identify the optimal shipping mode (including crowdsource options) based on what is being ordered and where it is going.
Emerging fulfillment technologies
Advancements in a number of emerging technologies also hold promise for how goods are ordered and delivered to end consumers. One is the internet of things, which is already making inroads across a variety of industries as well as in the home. One panelist believes we are only a few years away from when IoT-connected appliances and other devices communicate directly with distribution centers to automatically replenish products a consumer is running low on.
Another is drone technology. Is it feasible for delivery? Panelists seemed to think that while it is interesting to consider, the concept of drones delivering products to consumers’ homes across the country is something that likely will not become reality, at least in the near term. Instead, they said, companies should pay more attention to the growing use of drones and robotics in distribution centers involved in high-end, high-velocity fulfillment.
A third is the autonomous vehicle. Similar to drones, panelists were skeptical about the near-term use of autonomous vehicles for last-mile deliveries in densely populated areas. However, they did acknowledge that such vehicles could be a viable option for long-haul deliveries, especially as the number of drivers who are willing to drive these routes continues to decline.
UPS and FedEx trucks all along residential streets have become a common sight in the past few years, as e-commerce has made it easy for consumers to have a wide variety of products delivered straight to their doors. Yet as e-commerce continues to surge with no end in sight, the parcel delivery market sees increasing opportunity to ease the squeeze on capacity and help retailers cost-effectively provide the experience that consumers have come to expect.
This article is one in a three-part series capturing key insights from the 2018 Harris Williams Transportation & Logistics 3PL Conference. Read our other features here:
Published November 2018